Using the Z Score to Determine Trade Size and Boost Performance

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A win streak is a period during which consecutive gains are registered in an account, and a loss streak is the opposite. What kind of bearing do these series of wins and losses have for trade sizes? Obviously, if a style generates wins and losses in streaks, the results are not independent of each other. A profitable trade is suggesting the likelihood that there will be more gains in case the trader increases his position size. Conversely, if a loss warns us that it will be followed by more losses, and we should discard our original approach and seek our wealth at other occasions.

In other words, heads in one flip tells us that following coin tosses will bring us more heads, and tails will lead to more tails in subsequent trials. This knowledge may allow us to increase the size of our position with reasonable confidence, or to eliminate it in the case of loss. Z-score is the mathematical tool used for calculating the capability of a trading system for generating wins and losses in streaks.

The simple formula allows us to test our performance, and to check if the streaks generated present a random pattern or not. On the other hand, if our strategy is prone to generating streaks in a non-random fashion, we can use this knowledge to maximize our profits. A series is simply an unbroken string of wins or losses.

So all that we need to do, in order to understand if our strategy allows us to repeat our profits or losses in a non-random way, is to check its z-score, and to compare this to a series of numbers which we will call the confidence level. The confidence level is simply the normal distribution equivalent of the z-score we receive from our tests.

If this sounds complicated, all that the trader needs to know is that in order to be considered suitable for profit maximization in money management methods our test must produce results that are greater than 1.

We check the result on the above table and see that 1. This means that our results, while good, are not ideal in statistical terms, and we should be cautious in applying money management strategies to maximize our profits.

We also suppose that the string of trades are part of a larger sample that has a good enough z-score. The whole uptrend will often stay inside those 2 borders. It is based on measurement of min, and maximum prices for the definite number of periods. It is the minimal value from the set of all Low prices Lowest Low within n periods. It's the maximal value from the set of all High prices Highest High within n periods. The changes depend on the appearing of new max. The indicator's lines of are dynamic lines of support and resistance.

The lower trend line depicts support, the upper trend line depicts resistance. Price channels with downward slopes are bearish and channels with upward slopes are bullish. If wave 3 starts to accelerate to the point that it is higher than the upper channel line, the lines are depicted again along the top of wave 1 and the bottom of wave 2.

The last channel is depicted under the 2 corrective waves 2 and 4 and as a rule over the high. The upper line may have to be drawn over the top of wave if wave 3 is either unusually strong or an extended wave.

What does a streak of wins or losses mean?

The high degree of leverage can work against you as well as for you.

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A win streak is a period during which consecutive gains are registered in an account, and a loss streak is the opposite. It is based on measurement of min, and maximum prices for the definite number of periods.